My personal blog about international trade, public policy & politics, pop culture, and stuff that probably interests only me

Saturday, April 10, 2010

The DCCC's Recipe for Special Election Success: Protectionist Lies

Last Fall, we saw in the NY-23 special election that the Democratic Congressional Campaign Committee (DCCC) has absolutely no problem resorting to deceptive, protectionist politics when an important House election gets a little too close for comfort. Back then, they accused conservative candidate Doug Hoffman of wanting "to keep tax breaks for companies that want to ship our jobs overseas," and being backed by groups (like the Club for Growth) who support "unfair trade deals." (Cue ominous music.)

Well, the DCCC is facing a potentially devastating upset in the May 22 special election in heavily Democratic Hawaii, so guess where they've once again turned? That's right, protectionism:

For those of you who are too lazy to watch the video or who just like to read, here's the partial transcript:

In the race for Congress, you’ve heard a lot about Charles Djou, so it’s best to check the record. Even though more than 43,000 people in Hawaii are looking for work, Djou still supports tax breaks for big corporations who would export our future.

The DCCC's evidence for this claim, according to the ad, is that Djou signed Americans for Tax Reform's pledge to oppose tax increases. That doesn't commit him to defending every tax break. He could, consistent with his pledge, support legislation to abolish whatever corporate tax breaks are at issue, so long as that legislation also cut taxes by an equivalent amount. Djou could even sponsor the legislation.

The Democrats have, in short, invented a phony issue.

Stay classy, DCCC!

Second (as if #1 weren't bad enough), even if Djou did expressly support maintaining standard tax breaks for companies that happen to increase their overseas employment, ample evidence demonstrates that (a) such "outsourcing" is not very prevalent; (b) it's actually good for the US economy; and (c) any sort of alternative plan to "end tax breaks for companies that ship jobs overseas" is ridiculously impractical and intrusive. As I said last fall:

First, the idea that hordes of American jobs are being outsourced to China or India is a complete economic fiction. As Cato's Dan Griswold explains:

There is no evidence that expanding employment at U.S.- owned affiliates comes at the expense of overall employment by parent companies back home in the United States. In fact, the evidence and experience of U.S. multinational companies points in the opposite direction: foreign and domestic operations tend to compliment each other and expand together. ...

The fear of manufacturing jobs being shipped to China and Mexico is not supported by the evidence. While U.S. factories were famously shedding those 3 million net jobs between 2000 and 2006, U.S.-owned manufacturing affiliates abroad increased their employment by a modest 128,000 jobs.

Second, what about those evil "tax breaks"? Turns out they actually increase American jobs. Here's Griswold again:

Politicians are not usually specific about exactly what "tax breaks" they want to repeal. The biggest tax exemption for U.S. companies that invest abroad is the deferral of tax payments for "active" income. U.S. corporations are generally liable for tax on their worldwide income, whether it is earned in the United States or abroad. But the relatively high U.S. corporate tax rate is not applied to income earned abroad that is reinvested abroad in productive operations. U.S. multinationals are taxed on foreign income only when they repatriate the earnings to the United States. Not surprisingly, the deferral of active income gives U.S. companies a powerful incentive to reinvest abroad what they earn abroad, but this is hardly an incentive to "ship jobs overseas."

Such deferral may sound like an unjustified tax break to some, but every major industrial country offers at least as favorable treatment of foreign income to their multinational corporations. Indeed, numerous major countries exempt their companies from paying any tax on their foreign business operations. Foreign governments seem to more readily grasp the fact that when corporations have healthy and expanding foreign operations it is good for the parent company and its workers back home.

If President Obama and other leaders in Washington want to encourage more investment in the United States, they should lower the U.S. corporate tax rate, not seek to extend the high U.S. rate to the overseas activities of U.S. companies. Extending high U.S. tax rates to U.S.-owned affiliates abroad would put U.S. companies at a competitive disadvantage as they try to compete to sell their goods and services abroad. Their French and German competitors in third-country markets would continue to pay the lower corporate tax rates applied by the host country, while U.S. companies would be burdened with paying the higher U.S. rate. The result of repealing tax breaks on foreign earnings would be less investment in foreign markets, lost sales, lower profits, and fewer employment and export opportunities for parent companies back on American soil.

Politicians who disparage investment in foreign operations are wedded to an outdated and misguided economic model that glorifies domestic production for export above all other ways for Americans to engage in the global economy. They would deny Americans access to hundreds of millions of foreign customers and access to lower-cost inputs through global supply chains. In short, they would cripple American companies and their American workers as they try to compete in global markets.

Third (and economics aside), let's take a practical look at the idea of "ending tax breaks for American companies that ship jobs overseas." How exactly would this policy work? For example, if Boeing fired six people in Washington State and then hired six people in Germany for completely unrelated reasons, would that be "shipping jobs overseas" and cost Boeing billions in new taxes? Who would decide? Where's the line? For the DCCC's mythological policy to work, wouldn't the US Government basically need to examine - and judge! - every foreign and domestic employment decision of every company in the country? Wow, that sounds both fantastic and totally doable! Sign me up!

So, in short, the new DCCC ad attacking Charles Djou misstates not only his position, but also the underlying issue - a political deception two-fer!

But hey, the Democrats' new attack ad isn't totally worthless because it has provided us with yet another glimpse into the DCCC's protectionist playbook. And boy, is it pathetic.

How do you rank the last three administrations on trade: Clinton, Bush, and Obama? Clinton gets huge credit for NAFTA and getting China into the WTO, but he did have his share of slips (I think of the Japanese voluntary export restricitons, for example).

I think Bush was OK to good, but whenever I opine this I get a big roll of the eyes. The steel tariffs are brought out of course. I suppose you could blame the failure of Doha round on the US and there was a spat about Central America imports, if I remember. On Bush's plus, he got some trade deals done and he tried to defend the Dubai ports deal, but backed down when it was a clear political loser.

So far, I've seen nothing from the Obama administration to impress me.